If you are 65 or over with an income of between £21,800 and £28,090, you probably do not think of yourself as especially wealthy. But that is how you are treated through the tax system. People aged 65 to 74 are effectively taxed at 30 per cent for earnings between £21,800 and £27,790, while the 75-plus age group pays the same rate up to the slightly higher threshold of £28,090.

It is not that the government wants to punish this group - who are, in fact, only drawing an income at around the level of the average wage of £23,800. It is more that the Heath Robinson tax system we operate has not been fine-tuned enough in this area. And few people understand it well enough to get a campaign going for reform. Campaigns tend to focus on very obviously unfair issues - such as the 10p tax rate, people who have lost their pensions or big Council Tax surges.

The problem is the age allowance. Older people get a tax-free personal allowance over and above the £6,035 younger people receive. This extra allowance takes the 65- to-74-year-olds up to a tax-free threshold of £9,030 in 2008/09 and the over-75s to £9,180. But the allowance is clawed back for pensioners whose taxable income exceeds £21,800. They lose £1 in age allowance for every £2 of taxable income they have, with the net result that they are paying tax at 30 per cent for this part of their income, and that the age allowance is eaten away completely for those 65 -to-74-year-olds with taxable income over £27,790 (and for over-75s with income over £28,090).

Experts were aware of the issue but not greatly exercised by it. But in April the problem got worse as the age allowance was increased to a threshold of £9,030 from £7,550 for 65- to-74-year-olds (and to £9,180 from £7,690 for older pensioners) to compensate them for the ending of the 10p tax rate. This has exposed an even greater slice of income to the depredations of the clawback.

However, most financial advisers and tax experts would agree that people in this income group are still suffering from high marginal tax rates.

There are ways that people can avoid this unwelcome tax bill. If, instead of having taxable income, they have non-taxable income (from non-taxable Isas or Premium Bonds, for instance), they can avoid having to pay tax at this stage. This would mean putting some money into Isas, for instance, or other products that get no tax relief on the sums put in but are largely or fully tax-free when cash is taken out. For pensions, by contrast, there is tax relief on the contributions paid in but plan-holders are potentially subject to tax on income received as a pension.

Someone who was going to have taxable income of £21,800 'would be better in most cases to do Isas rather than additional voluntary contributions [the standard pension top-up for people in company pension schemes]', says independent financial adviser Donna Bradshaw of IFG Group.

George Bull, head of tax at accountant Baker Tilly, agrees that 'very tax-efficient returns' can be made in retirement if people opt for Isas or tax-free National Savings products, while tax expert John Andrews, chairman of the Low Incomes Tax Reform Group, says: 'If you are in that zone, it makes sense to consider investments which don't give you taxable income.' He also believes that neither this government nor a reasonably foreseeable future one would dismantle Isas. 'They would be protected,' he says. 'All [political] parties are of that view.'

However, not everyone agrees that Isas are a suitable solution. David Kauders of Kauders Portfolio Management thinks that Isas really only come into their own for 40-per-cent taxpayers. Otherwise, he says: 'The saving is trivial. Is it worth it?' And Tom McPhail, pension specialist at financial adviser Hargreaves Lansdown, says: 'There is an argument for looking at Isas... But I suspect that, for most people, it is unlikely to be sufficiently predictable or manageable.'

Confused? Don't be. The message really is one that is echoed throughout the world of sensible money management: if you have some flexibility, consider using it and think of spreading your savings into different investment vehicles, including pensions, Isas and National Savings.